April 03, 2020
The Economic Commission for Latin America and the Caribbean (ECLAC) has lowered regional GDP growth projections from positive 1.3 percent to negative 1.8 percent in light of the global COVID-19 pandemic. ECLAC projects that, with such a growth rate, poverty and extreme poverty will increase by 34 million and 23.3 million, respectively. In an op-ed, ECLAC Executive Secretary Alicia Bárcena notes that more than 47 percent of the region’s population does not currently have access to social security, placing the region’s elderly population in a dangerous position.
In the current situation, it cannot be overlooked that massive fiscal stimulus is needed to bolster health services and protect income and jobs, among the numerous challenges at hand. The provision of essential goods (medication, food, energy) cannot be disrupted today, and universal access to testing for COVID-19 must be guaranteed along with medical care for all those who need it. Providing our health care systems with the necessary funds is an unavoidable imperative.
When we talk about massive fiscal stimulus, we are also talking about financing the social protection systems that care for the most vulnerable sectors. We are talking about rolling out non-contributory programs such as direct cash transfers, financing for unemployment insurance, and benefits for the underemployed and self-employed.
Likewise, central banks have to ensure liquidity so the production apparatus can guarantee its continued functioning. These efforts must translate into support for companies with zero-interest loans for paying wages. In addition, companies and households must be aided by the postponement of loan, mortgage and rent payments. Many interventions will be needed to ensure that the chain of payments is not interrupted. Development banks should play a significant role in this.
And, certainly, multilateral financing bodies will have to consider new policies on low-interest loans and offer relief and deferments on current debt servicing to create fiscal space.
Economic distress will come through various channels in the coming months and will not be solely tied to domestic efforts to slow the spread of COVID-19. Remittances, a key source of revenue in many countries, are expected to diminish drastically. The region’s exports are also likely to take a hit as economic growth slows among trading partners. Commodities, which many countries in the region rely upon for foreign exchange, are experiencing significant price declines. ECLAC estimates a possible 10.7 percentage point reduction in the value of the region’s exports this year. The collapse of the tourism industry, especially important in the Caribbean, will also have significant impacts — in some countries calamitous.
Bárcena acknowledged that ECLAC’s projection of -1.8 percent growth in 2020 could turn out to be over-optimistic. Some private estimates already anticipate a much larger shock. Goldman Sachs, for example, projected -3.8 percent growth for Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, and Peru — which together account for some 89 percent of regional GDP.
S&P Global, although more optimistic than either ECLAC or Goldman in projecting -1.3 percent growth, notes that the risk is very clearly on the downside. As opposed to the six-quarter recession during the Great Recession, however, S&P projects only two quarters of negative regional growth in 2020. The current situation differs in another key regard, according to S&P: regional growth has been slow in previous years, placing economies in an already fragile place before the current slowdown. “Fixed investment has been either declining or slowing across most of the region in recent years,” the ratings agency notes. Further, S&P estimates that the length of the downturn will depend greatly on the public health response of individual countries:
The initial economic policy response to the COVID-19 pandemic in Latin America was similar to other parts of the world: emergency interest rate cuts and programs designed to boost liquidity, followed by fiscal stimulus measures in some countries, most notably in Chile, where a 5% of GDP recovery package was announced. These measures will help curb the fall in demand and reinvigorate the economic recovery once the pandemic wanes. However, the public health policy response, which has diverged across the region, will determine the length of the health crisis, and, as a result, affect the length of the economic crisis.
Unfortunately, few countries in the region are well positioned to robustly respond to the crisis. The Inter-American Development Bank (IDB) points out that 21 of the 26 regional countries borrowing from the IDB reported current account deficits in 2019. With an abrupt halt in countries’ access to foreign capital, many could find themselves in an unsustainable position. Early evidence points to an even greater outflow of capital from the region than during the 2009 financial crisis. Only Brazil and Mexico have capped dollar access via a bilateral swap line with the Federal Reserve to placate this outflow. In contrast to previous periods, however, the COVID-19 pandemic is a truly global problem, meaning that it will be difficult for countries to increase exports to make up for the lack of foreign capital.
Further, traditional stimulus measures are likely to be less impactful than during previous economic downturns given that many businesses will remain closed as part of the public health response to COVID-19. All of this makes a coordinated, international response imperative. The IMF has pledged to increase its lending capacity in response to the crisis, but it is unlikely the fund has the capacity to process loan requests from the more than 80 countries that have already inquired. Further, IMF-supported austerity policies ― such as those in Ecuador and Argentina ― have left those countries in an even worse position to respond to the current situation.
One way for the IMF to respond to the immediate needs of the region ― and developing nations across the globe ― would be with a significant allocation of Special Drawing Rights (SDRs), which function as a reserve currency. In response to the Global Recession in 2009, the IMF increased SDRs by some $250 billion, providing necessary financial lifelines for countries without access to foreign capital. But the current need is far greater. The IMF itself has estimated that developing countries will need some $2.5 trillion to adequately respond to the situation. CEPR economists Mark Weisbrot and Andrés Arauz have called for a 3 trillion SDR allocation (i.e., $4 trillion). The UN is calling for an allocation of 1 trillion SDRs, while some of the largest and most influential economic policy organizations in the US, like the Peterson Institute for International Economics, the Center for Global Development, and the Institute for International Finance support a 500 billion SDR issuance.
What is clear is that the cost of doing nothing is tremendous. The Imperial College of London estimates that, in a worst-case scenario, more than 3 million could die in Latin America and the Caribbean and more than 560 million could be sickened due to COVID-19. The study estimates that, if significant “suppression strategies” are implemented, the death toll could be reduced to 158,000.
But it is important to remember that regardless of the severity in terms of health or the economy, it is likely to be the most vulnerable in the region who will be most affected. As ECLAC notes, the COVID-induced recession will likely push more than 30 million people into poverty throughout the region. Further, many regional economies have expansive informal labor markets that will make it extraordinarily difficult to enforce physical distancing responses to COVID-19. While the wealthy will have resources to stay at home and survive, it will be the most vulnerable, forced to continue working just to live, who will bear the brunt of COVID-19. That will be true in terms of health outcomes as well as economic outcomes, and policy responses should be formulated with that consideration at the forefront.